Understanding the power of Institutions

Updated: Nov 19

Price movers in the stock market

Markets are moved by big money that comes in droves from institutions. The institutions include a barrage of entities that manage pooled money or monies of their rich owners.

 Understanding the Power of Institutions

To put this in perspective, institutions own over 80% of the equity market cap and account for 90% trading volume of all major equity indices in the US. With such high ownership and volume share, institutions are clearly the main movers of the market in either direction.

These institutions include mutual funds, hedge funds, pension funds, trusts, endowment funds, family offices, and many other set-ups that are formed to manage large pools of money from clients or members.

Vast resources and huge money power

Institutions are considered savvier and smarter than the average investor on the street because of their knowledge, expertise, and access to information. Most institutional investors employ savvy fund managers and analysts with a full-time job of finding opportunities, creating portfolios, and generating returns for clients and members.

The actions of many institutional investors are watched closely by individual investors to stay on the right side of the trade. Some investors place themselves in the trade only when they see institutional interest in the concerned asset class.

Due to their high ownership in many of the companies, the institutions also have the power to influence business and financial decisions. Some large institutions get board seats in these companies to protect their interest and ensure that the company is on the right track.

There are also institutions that take a large share in companies to influence the decision-making if they believe that those companies can do better with their interference.

Price Movers

Given their financial and research resources, institutions are big price movers in all markets. They are the price supporters at the bottom, price breakers at the top, and price movers in uptrends and downtrends.

Different institutions follow different philosophies and therefore get in and out at different times in the market. An institution like Warren Buffett’s Berkshire Hathaway would get interested in stocks in downtrends and panics, while a hedge fund like Paul Tudor’s Tudor Investment Corporation gets in when the prices are trending, as do I.

Because of the presence of numerous such institutions and trillions of dollars of assets they have, they impact prices in each phase of the markets.

As of today (15th Oct 2022) we are likely to be in or approaching the despair phase, or at least the point of returning to mean.

Many institutions will have large cash balances and will soon likely chase returns from a lower risk point. None of them will want to be behind the curve and such large inflows will at some point trigger another bull run, as it always has.....